Littlewoods v HMRC
[2015] EWCA Civ 515
Paul Lasok QC & Tarlochan Lall
May 2015
The Court of Appeal has upheld Littlewoods’ claim for adequate indemnity by way
of compound interest. HMRC however succeeded on Littlewoods’ appeal against
Vos J’s earlier decision1 that restitution claims are excluded by sections 78 and
80 Value Added Tax Act 1994 (“VATA”). This may be relevant to other claims for
compound interest where High Court proceedings have not been issued.
Lady Justice Arden DBE, who gave judgment for their lordships dealt with a
series of issue. The following is a summary of each of the issues and the Court’s
conclusion on each.
Issue 1: Are Littlewoods’ restitution claims excluded by sections 78 and 80
of VATA 1994 as a matter of English law and without reference to EU Law?
Yes.
Issue 1 arose out of what was called the ‘section 78(1) reservation’. That provides
that interest is payable under s78 “if and to the extent that [the Commissioners]
would not be liable to do so apart from this section”.
Littlewoods sought to argue that its claim for compound interest by way of restitution
was preserved by the section 78(1) reservation, without which section 78 would
have set out an exclusive statutory regime for the payment of interest. The Court
held that the section 78(1) reservation only preserves a ‘liability to pay interest’.
That would cover interest due under s84 VATA and s35A Senior Courts Act. The
Court accepted that any claim for interest must be founded on the claimant’s right
to return of the principal sum, which arose exclusively under section 80 because of
section 80(7) [36]. However, although “all claims for repayment of wrongly paid VAT
are claims under section 80(1), and will normally carry with them a restitutionary
claim for interest, including compound interest”, the related claim for interest falls
within section 78 [43]. The restitutionary claim itself does not create a liability to
pay interest. The interest reverses the “benefit gained by unjust enrichment, which
may be calculated by reference to interest rates. But it is strained use of language
to describe this as a liability to pay interest” [45] Effectively, the court is saying
that, although in economic terms the reversal of the benefit may be akin to interest,
1. Littlewoods Retail Ltd and others v Revenue and Customs Commissioners
[2010] EWHC 1071 (Ch); [2010] STC 2072
as it is not actually interest, strictly, it was clear that Parliament did not intend to
include the restitutionary claim within the section 78(1) reservation. That may
appear to be inconsistent with the Court’s decision on ‘objective use value’.
However, “if the section 78(1) reservation includes restitutionary claims for
interest, section 78 would never apply” [43].
A simpler way of putting the Court of Appeal’s point is that section 78(1) was
intended to ensure that all taxpayers had the same minimum entitlement
to interest. Hence, it applies where the taxpayer’s right or claim does not
otherwise carry with it a right to interest. As restitutionary VAT claims are
covered exclusively by section 80 (which does not provide for the award
of interest), it follows that section 78 applies. That conclusion could not be
avoided by elevating Littlewoods’ claim into a distinct claim for the time value
of the overpaid VAT.
Issue 2: If Littlewoods’ restitution claims are excluded by sections 78
and 80 VATA 1994, is that exclusion contrary to EU law? Specifically,
notwithstanding the right to interest under section 78 VATA 1994, does that
exclusion violate the principle of effectiveness by depriving Littlewoods
of an adequate indemnity for the loss occasioned through the undue
payment of VAT?
The Court essentially answered both questions affirmatively so far as
Littlewoods was concerned.
The wider application of this decision was qualified. Firstly, the ‘adequate
indemnity’ the CJEU ruled had to be given was, the Court said “not a rigid
straitjacket and certainly does not go so far as to require compound interest
in every case” [108]. Secondly, “whether s78 affords an adequate remedy
for the losses occasioned to an individual taxpayer was not obvious and will,
as the court [the CJEU] says at [30], depends on a consideration of “all the
circumstances of the case”” [96].
Like Henderson J in the High Court, the Court of Appeal analysed developments
in the CJEU in Littlewoods and later cases. The Court defined, by reference
to authorities, the content of the EU law right to reimbursement. Firstly, it is a
personal or private right [85]. Secondly, at [94] it said “that it is now tolerably
clear that EU law requires national law to reimburse the losses occasioned
by the unavailability of money as a result of tax being levied unlawfully.” The
Court added “the use of the word “reimbursement” in [25] is, in our judgement,
of great importance.” Thirdly, EU law does not merely require “the provision of
a remedy which meets the description “interest”” [95]. Fourthly, “the taxpayer
is “entitled to reimbursement... of amounts paid to the state or retained by it.”
Fifthly, the principle of effectiveness is not complied with “provided the resulting
payment is not deprived of substance.” The national rules must not deprive the
taxpayer of an “adequate indemnity”. Sixthly, as stated above, what amounts
to adequate indemnity will depend on all the circumstances of the case [96].
HMRC placed great reliance on paragraph [27] in the CJEU’s judgment, namely
that ‘it is for the internal legal order of each Member State to lay down conditions
in which such interest must be paid, particularly the rate of that interest and its
method of calculation (simple or ‘compound’ interest)’ subject to the principles
of equivalence and effectiveness. That, HMRC argued, gave national law ‘a
wide margin of discretion or autonomy as to substance or procedure’. HMRCs’
argument went on to say that EU law requires the remedy of compensation for
the unavailability of money. Simple interest provided that remedy. HMRC also
placed reliance on the opinion of Advocate General Trstenjak and observations
of the CJEU that the simple interest awarded to Littlewoods exceeded the
principal amount repaid. At [99], the Court stated that HMRC misunderstood
Littlewoods’ case. As Henderson J had stated, Littlewoods’ case was not
that EU law always requires the payment of compound interest but “rather
that interest reflecting the use value of the money received”. The principle of
effectiveness required the court to establish the entitlement in principle, but left
the national court “to apply it in varying factual circumstances of each case. At
[100] Arden LJ said:
“[27] of the court’s judgment is therefore doing no more than pointing out
that it is for the national court to decide on a way of working out the award
– the method of calculation. Simple interest at an appropriate rate may
well be a satisfactory way of arriving at an adequate indemnity in many
cases, with higher rates being necessary for longer periods. The difference
between simple and compound interest, moreover, only starts to emerge
once several years are involved, particularly where rates are low. It is for
the national court to do the arithmetic.”
At [102] Arden LJ added
“Once one appreciates from [25] that the content of the right is reimbursement
of the losses sustained by the unavailability of money, a formulation which
is echoed in [29], the argument that [27] is concerned in any way with
modifying the content of the right falls away. HMRC’s argument therefore
places weight on [27] which it cannot properly bear.”
The Court would only go so far as to say that “adequate indemnity” did not have
the meaning contended for by HMRC [107]. The court also emphasised that its
conclusions only apply to circumstances of Littlewoods’ case.
The Court helpfully defines the content of the EU right to reimbursement.
However, the wider application of that right will turn on the facts of each case.
Issue 3: If issues 1 and 2 are answered in the affirmative:
(A) Can sections 78 and 80 of VATA 1994 be construed so as to conform
with EU law (and if so how), or must they be disapplied?
(B) If section 78 and 80 VATA 1994 must be disapplied, must they be
disapplied so as to allow only Woolwich-type restitution claims, or (b)
both Woolwich-type restitution claims and mistake based restitution
claims?
The Court concluded that sections 78 and 80 VATA could not be construed
to conform to EU law, so they had to be disapplied. Once disapplied that
permitted both Woolwich and mistake based restitution claims to be made.
By issue 1, the Court had held that claims for restitution were excluded by
sections78 and 80. Issue 2 confirms that a taxpayer has an EU law right to an
adequate remedy. Issue 3 is effectively concerned with how the EU law right is
given effect in national law.
In order to invoke their EU law rights, taxpayers need a cause of action.
That cause of action may lie in statute or common law. The arguments for a
conforming construction sought to place the cause of action in s78. In other
words, they sought to invoke the EU law right through s78. The court rejected
that contention, saying:
“... the statutory bar in VATA 1994 to common law claims for compound
interest stems from section 80(7) whether one adopts the first or the second
approaches to construction we have set out in relation to issue 1. Even
if section 80(7) does not have the effect of removing Littlewoods’ cause
of action in restitution for interest, it does have an obvious impact on the
construction of section 78(1) in terms of whether it should be treated as an
exhaustive remedy. The two sections have to be construed as a consistent
code. Looked at in this way, it is difficult to treat the exclusion of the
common law claims for interest as anything but a cardinal feature of the
legislation and, in our view, the conforming construction suggested by Mr
Elliott does go against the grain. The accommodation of Littlewoods’ EU
claims has therefore to be advanced through the disapplication of sections
78(1) and 80(7) VATA 1994.” [118]
The court started on issue 3B by stating that “under domestic law a claimant is
entitled to pursue at his own election whatever causes of action are available
to him in order to obtain the relief he seeks” [119]. Accordingly, once it was
concluded that sections 78(1) and 80(7) were to be disapplied, Littlewoods
had a choice as to how to invoke its EU law right. It had done so through
its restitutionary common law claims made in the High Court. There was
no dispute that both Woolwich and mistake based claims were capable of
providing “an appropriate measure of recovery to vindicate the taxpayer’s San
Giorgio rights” [120].
HMRC argued that the Court was not required to disapply sections 78(1) and
80(7) beyond the point of allowing Littlewoods to pursue their Woolwich claims.
They relied on provisional support from Vos J’s decision in Littlewoods (No.
1)2. However, following FII (SC) and FII (ECJ) III3 the Court found that the
law had developed such that once exclusionary provisions such as those in
s78(1) and 80(7) had been disapplied, all applicable causes of action became
available to taxpayers, which in this case were both Woolwich and mistakebased claims. The national court could not choose which of the two remedies
should be provided [136, 142].
It is noteworthy that Littlewoods succeeded by reliance on the principle of
effectiveness rather than the principle of equivalence. Although, on behalf of
Littlewoods, it was argued that the principle of equivalence was engaged, that
argument failed essentially because Littlewoods was not able to demonstrate
discriminatory treatment. It was accepted that sections 78(1) and 80(7) apply
indiscriminately to both domestic and EU law claims for repayment of overpaid
tax [133], so the principle of equivalence did not assist Littlewoods. The
principle of effectiveness required the “court to disapply some rule of national
law in order to give effect to the claimant’s EU law rights”[137]. The Court held
that this engaged section 2(1) of the European Communities Act 1972 which
“...imposes on the court an obligation and gives it the power to enforce the
relevant rights under EU law in priority to and notwithstanding any contrary
provisions of domestic law. It therefore allows Littlewoods’ San Giorgio
rights to override sections 78(1) and 80(7) VATA 1994 but it does not
prescribe how the courts applying domestic law are to give content to those
rights. That is done by applying (so far as necessary) the principles of
equivalence and effectiveness which qualify the long-standing EU principle
of procedural autonomy to the extent that the remedies available under
national law may be inadequate.” [138]
This led to the conclusion at [141]
“...that the process of disapplying any domestic rule of law in favour of
EU law leaves the national court with procedural autonomy in relation
2. Littlewoods Retail Ltd and others v Revenue and Customs Commissioners
[2010] EWHC 1071 (Ch); [2010] STC 2072
3. FII Test Claimants v Revenue and Customs Commissioners [2012] UKSC
19; [2012] 2 AC 337; Case C-362/12 Test Claimants in the Franked Investment
Income Group Litigation v Revenue and Customs Commissioners [2014] AC 1161
to available remedies. But consistently with that, it does not give to the
national court any power of selection which it does not have under domestic
law. The national court is left to apply its ordinary domestic rules in the
form of the causes of action which are available to a taxpayer seeking to
enforce its EU claims. The difficulty with HMRC’s argument on this point
is that it seeks to attribute to or invest the national court as a function of
the principle of effectiveness with the power to select which remedies the
claimant should be permitted to pursue when the object of the principle
of effectiveness as explained in Littlewoods (ECJ) is to ensure that the
taxpayer’s San Giorgio rights are enforced. The ECJ in [33] and the earlier
cases there referred to has made it clear that the choice and availability of
remedies is exclusively a matter of domestic law subject only to their being
effective remedies for the purpose of enforcing the EU rights in question.
We consider that there is no support in these cases for what Henderson
J described as this minimalist approach to disapplication and that such a
rule would be contrary to principle. Once it is clear that the domestic law
rules for the recovery of overpaid tax are incapable of providing recovery
in accordance with the San Giorgio principle, they fall to be disapplied in
favour of the claimant’s EU rights. The national court has no power in our
view to disapply the domestic bar to the enforcement of those rights on a
selective basis. The procedural autonomy it is granted under EU law simply
requires it to make available to the claimant the remedies which domestic
law would give him had the claim for overpayment been a purely domestic
one. Once therefore section 78(1) falls to be disapplied in order to give
effect to Littlewoods’ San Giorgio-based claims the English court has no
further control over the causes of action available to the claimant. Its only
power is to adjudicate and enforce those claims in accordance with the
law.”
QUANTUM
Littlewoods had claimed amounts that represented the benefit derived by the
Government from their overpayments rather than the loss to them from not
having use of the money. Their claim was for interest saved by the Government
calculated at the cost of borrowing at government rates. The Government
essentially claimed that the actual benefit to them was lower and that is all it
should have to pay.
Henderson J had decided that the rate of interest should be determined
objectively and that it should be the rate at which the Government could borrow
at the relevant time. Henderson J also took the view that the role of actual
use value was very limited. On this aspect, the Court of Appeal disagreed
with Henderson J, relying on two Supreme Court decisions in Sempra and
Benedetti4.
The Court of Appeal agreed that the starting point is the objective use value. In
restitution claims, the thing to be valued is the benefit to the defendant (“D”), in
this case HMRC. Say that the objective use value is 10. If the D can show that
the actual use value to D is, say 4, Lord Nicholls in Sempra had said that “the
law of restitution is sufficiently flexible to achieve a just result” ([119] quoted
at [157] in the Court of Appeal’s decision). Henderson J had also referred to
the concept of “subjective devaluation”, but concluded that the law on that
was at an early stage of development. That expression had been introduced
by Lord Nicholls in Sempra where the principle of subjective devaluation was
established. The concept was further developed in Benedetti.
Sempra, being a case of overpaid tax was of greater relevance to Littlewoods.
Benedetti was concerned with the valuation of services which had been
provided outside a contract. The essentially issue there was what the recipient
of the services should pay for them, so they had to be valued. The majority in
Benedetti agreed that it was open to D to prove that the value of services to
D was less than their market value [171]. That principle is based on a “based
on the fundamental need to protect a defendant’s autonomy. It is important
to note that subjective devaluation is not about the defendant’s intentions or
expectations but is an ex post facto analysis of the subjective value of the
services to the defendant at the relevant time.” (Lord Clarke in Benedetti
quoted at [171]).
The principle of subjective devaluation may engage in particular where D
essentially receives something involuntarily. Its relevance in Littlewoods was
that there was no evidence that HMRC knew anything about the overpaid tax
for many years. Also, Henderson J had been satisfied that the actual benefit
HMRC obtained from Littlewoods’ overpayment was less than the market value
of the time value of that money, so actual use value could be relevant (see
[187]). However, the Court held:
“...we do not consider that HMRC should be treated as if it were an
involuntary recipient of overpayments of tax. Taxpayers have to pay tax
even though they may not have received any assessment from HMRC. In
this case there were also assessments. Even if HMRC had no idea at the
time that Littlewoods was making overpayments of tax, it still cannot in our
judgment be said to be in the position of the an involuntary recipient of a
benefit. It is obvious that, under a system of self-assessment, tax will from
time to time be paid in error and that that tax will have to be repaid. That
4. Sempra Metals Limited v Inland Revenue Commissioners [2007] UKHL 34;
[2008] 1 AC 561; Benedetti v Sawiris and others [2013] UKSC 50 [2013] 4 All ER
253.
is an inherent risk of a system of self-assessment. Statistically a certain
percentage of tax receipts will have to be repaid, and we consider that
government should not be able to discharge its obligations in restitution to
the taxpayer by choosing to take a course which would dilute its repayment
obligations.”
Accordingly, the Court concluded that objective use value applied to value the
time value of the overpayments made. The Court also upheld Henderson J’s
judgment that the compound interest payable should continue to run after the
date of the repayments of the principal amounts of overpaid VAT until the date
of judgment.
WHERE DOES THIS LEAVE US?
On the facts, Littlewoods succeeded in its claims. The Court of Appeal, like
Henderson J, has given a strong indication that in many cases, especially
where overpaid tax runs over relatively short periods of time, the payment of
simple interest is likely to constitute adequate indemnity. Where, however, a
taxpayer can show that simple interest is not broadly commensurate with the
loss of use value of the overpaid tax, it is open to taxpayers to claim compound
interest. The most obvious example is the many Fleming claims for overpaid
tax extending over long periods, a number of which, like Littlewoods’ claim, go
back to 1973.
The Court of Appeal’s findings with regard to the nature and scope of the EU
law right and how it is given effect, namely through whatever cause of action a
taxpayer chooses (whether it be Woolwich or a mistake based claim rather than
s78 VATA), makes it uncertain whether a taxpayer is effectively obliged to start
a High Court action or may claim through tribunal proceedings.
The Court of Appeal points out that the section 80 regime imposes on HMRC a
statutory duty to repay overpaid tax, which normally carries interest (see [31],
[42] and [43]). HMRC’s duty is to comply with the law, which includes EU law.
It follows that an HMRC decision, on a section 80 claim derived from EU law,
which does not include an award of interest giving the claimant an adequate
indemnity for being kept out of his money, is an unlawful decision under EU law.
The same applies to late payment of input tax, where interest is not paid5.
The tribunal has jurisdiction over claims that HMRC decisions are unlawful and,
more particularly, has jurisdiction to decide that HMRC decisions are unlawful
under EU law.
5. Emblaze Mobility Solutions v HMRC [2014] UKFTT 679 (TC).
Therefore, tribunal proceedings appear to be among the options that the Court
of Appeal considers a taxpayer may select from. In tribunal proceedings, there
need be no disapplication of section 80. Disapplication applies only in relation
to section 78 and, where relevant, section 85A: HMRC cannot seek to sustain
the legality of their decision before the tribunal by relying on statutory provisions
that have to be disapplied under EU law.
We have another long and detailed judgment dealing with complex points of
law. Unsurprisingly, it appears from recent press reports that HMRC have
decided to seek permission to appeal to the Supreme Court.
The comments made in this case note are wholly personal and do not reflect
the views of any other members of Monckton Chambers, its tenants or clients.
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